The global crisis of institutional legitimacy

While watching another Arab government get toppled on Sunday evening — this time that of Muammar Gaddafi, in Libya — I was also reading George Magnus’s excellent note for UBS, entitled “The Convulsions of Political Economy”; you can find it chezZero Hedge.

Convulsions is right — not only in the Arab world, of course, but also in Europe and the US. And the result is arguably the most uncertain outlook, in terms of the global political economy, since World War II ended and the era of the welfare state began.

As Magnus says:

It seems that we are having sometimes esoteric tiffs between Keynesians and Austrians about if and how governments should sustain jobs and growth. But, deep down, we are having a much more significant debate as we are being forced to redefine what we think about the rights and obligations of citizens and the State.

Most fundamentally, what I’m seeing as I look around the world is a massive decrease of trust in the institutions of government. Where those institutions are oppressive and totalitarian, the ability of popular uprisings to bring them down is a joyous and welcome sight. But on the other side of the coin, when I look at rioters in England, I see a huge middle finger being waved at basic norms of lawfulness and civilized society, and an enthusiastic embrace of “going on the rob” as some kind of hugely enjoyable participation sport. The glue holding society together is dissolving, whether it’s made of fear or whether it’s made of enlightened self-interest.

In Europe, the speed with which the transmission has been thrown violently into reverse is nothing short of astonishing. The whole second half of the 20th Century was devoted to building strong European institutions which would maximize cooperation and minimize mistrust and finger-pointing between member states. Great statesmen put European unity on a par with narrow national self-interest, and the resulting institutions — the euro, of course, but also things like the Schengen Agreement and the European Convention on Human Rights — transformed the blood-soaked continent of the 1940s into a peaceful and prosperous model for how disparate countries could successfully work together to the benefit of them all.

And the US, of course, the global hegemon, a continent unto itself, stood as a beacon for the rest of the world: 300 million disparate people coming together to create something unprecedented — an economic, political, and military colossus built on solidly democratic principles. E pluribus unum.

But countries and institutions can ultimately survive only with the will and consent of those they govern — and that consent is evaporating around the world. Europeans have no love for Europe’s institutions, be they the euro or the ECB or the EFSF. Unemployment, in much of Europe, has reached the point of no return — the point at which it becomes endemic, stubbornly immune to attempts to tackle it. In turn, that results in broad-based cynicism and disillusionment when it comes to politics and politicians generally.

And then on this side of the pond we have Rick Perry — harbinger and prime example of the way in which mistrust in federal institutions has moved from the fringe to the mainstream. Indeed, what we see with Perry is far more than mistrust — he actually denies most federal institutions their existential legitimacy, and has written a book explaining at length how everything from Social Security to federal bank regulation is in fact unconstitutional.

When Perry accuses Ben Bernanke of treachery and treason, his violent rhetoric (“we would treat him pretty ugly down in Texas”) is scary in itself. But we shouldn’t let that obscure Perry’s substantive message — that neither Bernanke nor the Fed really deserve to exist, to control the US money supply, and to work towards a dual mandate of price stability and full employment.

For the first time in living memory, someone with a non-negligible chance of winning the US presidency is arguing not over who should head the Fed, but whether the Fed should even exist in the first place.

Looked at against this backdrop, the recent volatility in the stock market, not to mention the downgrade of the US from triple-A status, makes perfect sense. Global corporations are actually weirdly absent from the list of institutions in which the public has lost its trust, but the way in which they’ve quietly grown their earnings back above pre-crisis levels has definitely not been ratified by broad-based economic recovery, and therefore feels rather unsustainable. Meanwhile, the USA itself has undoubtedly been weakened by a shrinking tax base, a soaring national debt, a stretched military, and a legislature which has consistently demonstrated an inability to tackle the great tasks asked of it.

It looks increasingly as though we’re entering Phase 2 of the global crisis, with 2008-9 merely acting as the appetizer. In Phase 1, national and super-national treasuries and central banks managed to come to the rescue and stave off catastrophe. But in doing so, they weakened themselves to the point at which they’re unable to rise to the occasion this time round. Our hearts want government to come through and save the economy. But our heads know that it’s not going to happen. And that failure, in turn, is only going to further weaken institutional legitimacy across the US and the world. It’s a vicious cycle, and I can’t see how we’re going to break out of it.